July Is the Right Time for a Mid-Year Tax Check-In
By the time July arrives, you've completed six months of business activity and have a much clearer picture of how the year is shaping up. Mid-year is an ideal time to pause, review your financials, evaluate opportunities that may affect this year's tax liability, and begin planning for the remainder of the year.
Start with a single question: Where do you think you'll finish the year?
Your year-to-date numbers are the starting point. Layering in what you already know about the months ahead—signed contracts, committed purchase orders, and recurring client relationships—makes the picture more complete. A service business with three months of contracted work, for example, has a reasonable foundation for projecting its year-end position. That projection, compared against last year's tax liability, gives you a working estimate of where you stand and what decisions are worth making before December.
Cash flow and tax liability are not the same number
One of the most common tax planning mistakes business owners make is using their bank balance as a proxy for their tax situation. It's an understandable shortcut, but it may not be very accurate.
Cash flow reflects the money moving into and out of your business. Tax liability is determined by taxable income, which is shaped by the tax rules that apply to your business: depreciation on qualifying assets, retirement contributions, owner compensation structure, and investment decisions made throughout the year. A business can show strong cash reserves and still carry a significant tax obligation, or conversely, appear lean on cash while benefiting from deductions that reduce what's owed.
Understanding both numbers, your financial position and your anticipated tax liability, provides a more accurate view of where the business stands.
Plan for the Rest of the Year
Once you have a reasonable year-end projection, you can evaluate planned spending with the tax calendar in mind. Investments you've already budgeted, equipment upgrades, a new website, office improvements, marketing spend, and technology may carry more strategic value when their timing is considered alongside your projected tax liability. If those purchases are already part of the plan, reviewing them in a mid-year tax conversation helps determine when and how to move forward.
Retirement plan contributions are worth the same review. If you haven't established a plan yet or haven't maximized contributions for the year, this is a practical point to assess what's possible before December.
Is your business structure still the right fit?
For service businesses consistently generating more than $100,000 in annual profit, it may be worth discussing whether an S corporation election makes sense. Here's why it comes up at that income level: as a sole proprietor or single-member LLC, all net profit is subject to self-employment tax. An S-Corp allows the owner to pay themselves a reasonable salary plus additional profit as a distribution, which is not subject to the same self-employment tax. In the right situation, the result can be meaningful savings.
There is a tradeoff. An S-Corp carries additional administrative requirements: payroll, separate tax filings, and more structure than a simple LLC. Whether the tax savings justify those requirements will depend on your numbers and situation. A conversation with your CPA can help determine whether it's appropriate based on your specific circumstances.
Laura's four-step mid-year tax planning conversation
When we discuss a mid-year review, the conversation follows a consistent framework.
We work through four questions:
Where do you think you'll finish the year?
Review year-to-date results and factor in what you already know about the months ahead, including signed contracts, purchase orders, committed projects, and anticipated revenue for the rest of the year.How does this compare to last year?
Compare current projections against the previous year’s tax liability to help estimate this year’s tax position.What investments are you prepared to make [to reduce tax liability]?
Discuss planned business investments that are already part of the budget, and evaluate how and when they're made in the context of this year's tax position, including: equipment, technology, marketing, advertising, office improvements, or retirement planning.Will changing the corporate structure be beneficial?
If you're operating as an LLC and your profitability has grown consistently, this is the question that determines whether a structural change is worth exploring before year-end.
Plan while you still have time to act
July provides an opportunity to review the first half of the year while there is still time to make thoughtful decisions before December.
Tax planning services, at their core, are about reviewing where your business stands, projecting where it's headed, and making deliberate decisions while there's still time to act. A mid-year meeting with your CPA is that conversation in practice.
Are you ready for some professional guidance? Schedule a mid-year tax planning consultation with Laura at Agile Accounting and discuss how she can support you!